WASHINGTON The Pentagon is gearing up to restructure Lockheed Martin Corp's F-35 Joint Strike Fighter program for a third time in three years, sources said, with production of more than 120 more planes to be postponed to save money and allow more time for development.
The latest changes should save the Pentagon about $15 billion from fiscal 2013 through 2017 and will be part of the fiscal 2013 budget plan to be sent to Congress in February, according to three sources familiar with planning for the Pentagon's largest weapons program.
President Barack Obama will join Defense Secretary Leon Panetta at the Pentagon on Thursday to discuss overall defense budget cuts and a revamped military strategy.
They are expected to mention the F-35 fighter plane and reiterate continued support for the program, but details of the restructuring plan and plans for other big weapons programs may not emerge until later this month, the sources said. The sources declined to be identified because they were not authorized to discuss the plans publicly ahead of the official release of the president's budget.
Last month, Vice Admiral David Venlet, the Pentagon's program manager for the F-35, told online journal AOL Defense that production of the new airplane should slow until what he called a "surprising" number of problems with it could be fixed.
Virginia-based defense consultant Jim McAleese said he expected the Pentagon to defer production of well over 120 F-35 fighter planes until later years, cutting the cost of the program by about 25 percent over that time period.
But he said it was crucial that the department was sticking to its overall target of buying 2,443 fighters for the Air Force, Navy and Marine Corps. That, he said, would keep the unit cost of the airplane from rising dramatically and triggering a congressionally mandated review that could lead to the program's cancellation.
"Ultimately, the F-35 will survive, but there will be another significant delay in the production ramp up," McAleese said.
The Pentagon's plan for the F-35 had called for production of 423 airplanes from 2013 through 2017 for the Air Force, Marine Corps and Navy, excluding international orders.
The latest restructuring would delay work on over 120 of those planes, although international orders could offset some of the effect on Lockheed, McAleese said, adding that Japan's recent decision to order 42 F-35s "couldn't have come at a better time."
Rob Stallard, defense analyst with RBC Capital Markets, downgraded Lockheed's stock to "underperform" on Wednesday, telling investors that as the Pentagon's largest supplier, Lockheed company faced a difficult year given continuing uncertainty about pending defense cuts.
Stallard said the F-35 program remained in the "firing line" and a cut to the overall buy could be on the horizon. Moreover, negotiations between Lockheed and the Pentagon for a fifth batch of F-35 fighter jets would likely result in tougher terms for the company, he wrote in an analyst note.
Although Lockheed was committed to paying strong dividends, a steady stream of negative news on defense issues would likely cap the upside potential for the stock, Stallard wrote, noting that the stock was already trading near a year-high.
Lockheed shares fell $1.11, or 1.4 percent, to close at $80.91 on the New York Stock Exchange on Wednesday.
Joe DellaVedova, spokesman for the Pentagon's F-35 program office, said it was premature to discuss budget decisions, but said the program was continuing to make progress on its flight test program, and had logged over 2,200 hours in flight tests.
He said the first short-takeoff production plane, also known as the F-35B, was scheduled to arrive at Eglin Air Force Base in Florida on Friday.
Lockheed is building the F-35 warplane for the United States and eight partner countries: Britain, Australia, Norway, Denmark, Turkey, the Netherlands, Italy and Canada at a projected cost of $382 billion. Israel and Japan have also agreed to buy F-35 warplanes.
Altogether, Lockheed estimates that it could sell 800 to 1,500 of the new warplanes internationally.
(Reporting By Andrea Shalal-Esa; Editing by Gary Hill)